to task
In a letter to chief executives of all insurers that provide
with-profits funds, the UK financial services regulator, the
Financial Services Authority (FSA), has hammered home the need to
treat policyholders fairly. The letter followed two thematic
reviews by the FSA this year which found varying standards of
governance of funds.
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The first review looked at how insurers provide independent input
into their management of with-profits funds to ensure that
policy-holder interests are considered. This review, which looked
at 40 of the largest with-profits insurers, found a number of
issues:
• some insurers’ arrangements for independent input did not involve
consideration of wider issues that could affect whether
policyholders are treated fairly;
• insurers need to identify and manage any conflicts of interest in
the way that the firm uses independent reviewers to look at the
firm’s management of with-profits funds; and
• insurers did not always provide timely information to those
responsible for the independent review of the management of
funds.
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By GlobalDataThe second review looked at 13 with-profits funds that closed to
new business before the introduction of the FSA’s rules. It found
that the management of some closed funds had not devoted sufficient
attention to managing the run-off of the fund.
Commenting, Sarah Wilson, FSA sector leader for insurance, said:
“Since the FSA’s introduction of new rules for with-profits funds
in 2004/05, we have been monitoring individual firms’ compliance
with the rules. The mixed picture shown in the reviews of two key
areas is of concern. Some firms are not doing enough to provide
independent input into the management of with-profits funds or are
not devoting enough attention to running off closed funds.” She
added that the FSA will continue to assess insurers on these issues
and will take action when customers are not being treated
fairly.
Not far enough
Not all interested parties believe the FSA’s letter goes far
enough. One of these is the Financial Services Consumer Panel
(FSCP), an independent body formed by the FSA to advise on
interests and concerns of consumers. Though welcoming the FSA’s
letter, the FSCP noted that it “could have gone further”.
In particular, the FSCP said, it believes that the FSA’s
interpretation of the rules on independent representation of
policyholders interests is not strong enough. There are also other
issues that need to be addressed to enable policyholders to have
fair access to and understanding of their with-profits funds.
On the issue of independent input into the management of
with-profits funds, for example, the FSCP noted that while the FSA
requires an independent voice to represent policyholders, such as a
with-profits committee, the FSCP’s research showed that 60 percent
of these committees use directors of the main board of the company
or individuals closely associated with the company, such as
non-executive directors and former directors. Although this meets
the current requirements, the FSCP believes that this is not
independent enough.
The FSCP called on the FSA to take action on the issue of
independent input and on a number of other aspects of with-profits
funds it believes require review. These include:
• insurers’ ability to use with-profits capital to fund new
business development, pay shareholder tax and settle mis-selling
claims;
• the availability of advice. The FSCP research found about 8
million people cannot get essential advice about whether they
should keep or transfer out of their closed with-profits policies
because they cannot afford to pay for fee-based advice, while
commission-based advisers are reluctant to take them on for fear of
future reprisals from the FSA;
• communications from insurers should include all material facts
written clearly so policyholders can understand and act on the
information. The FSCP’s research found that communications from
with-profits companies often fail to set out options for
policyholders clearly; and
• the FSA should consider requiring companies to provide a
simplified financial statement that sets out how it has used its
with-profits fund over the past year.
“The FSA is making some progress in challenging companies to treat
their with-profits policyholders fairly, but there is still some
way to go,” said John Howard, chairman of the FSCP. “These are
complicated products, and people need help to understand how to
make the best investment decisions. If this is not done, consumers
will yet again be left with little confidence in this sector of the
market.”
